Improve Your Borrowing Power with an SBA Loan Guarantee

Whether you're starting a new business or expanding an existing one, few activities will have as much long-term impact on your business as obtaining adequate financing. The SBA can be a valuable ally to any business seeking capital. SBA's finance programs provide guarantees for short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses.

It is important to keep in mind that the SBA does not make the loans, but rather guarantees loans that you apply for and receive from a bank or credit union.

What are the advantages of an SBA loan? The first advantage is getting approved for a loan that you might not get without SBA support. With an SBA loan guarantee, if a borrower fails to repay the loan, the lender can recover 50 to 85 percent of the outstanding loan balance from the SBA. The borrower, however, remains obligated for the full amount due. This reduces the lender's risk so they are more willing to approve the loan.

Another advantage may be a lower equity requirement. While some equity is always required to show owner's commitment to the business, commercial lenders generally require more equity on a conventional loan than with an SBA guaranteed loan.

The SBA guarantee can help credit-worthy borrowers overcome the problem of a weak loan application associated with inadequate collateral. To secure the loan, you must pledge sufficient assets to the extent they are reasonably available. However, no loan will be declined for insufficient collateral alone, as long as all available and worthwhile collateral (both business and personal) is pledge as security for the loan.

Next, lenders like to get their money back as soon as possible to reduce the risk of non-payment. With SBA support, most lenders are willing to stretch the payment terms out over a longer period. This reduces the monthly payment amount and eases the cash drain on the business.

Finally, with an SBA guaranty you are assured to have a fully amortizing loan - no balloon payments. SBA's philosophy is to give borrowers confidence, knowing that the payment will be relatively stable without having a large payment at the end.

Does my business qualify for an SBA loan? The eligibility requirements are designed to be as broad as possible so that our lending programs can accommodate the most diverse variety of small business financing needs.

To qualify for SBA financing, a business must be independently owned and operated as a for-profit concern. It must be open to the general public and not discriminate. The business must be small according to our size standards - typically less than $5 million in net profit (2-year average) and have a net worth of less than $15 million.

The business must demonstrate a need for SBA backing such as not able to obtain financing on reasonable terms elsewhere. As an example, applicants with an abundance of personal resources could use those personal resources to finance their business without an undue hardship. An excessive lender requirement that limits an applicant's ability to profit and grow their business would be deemed unreasonable. Note that making a balloon payment may be considered unreasonable terms and justify the refinance of the debt.

The owner/managers must also have a clean criminal history and a reasonable credit history. Persons incarcerated, on probation or on parole are prohibited from SBA financing. Also, individuals that have defaulted on other federal debt are ineligible.

While most businesses are eligible, SBA limits certain types of businesses, such as those engaged in lending, real estate development, investment or speculation. As an example, SBA does not guaranty loans for apartment buildings as they are considered investment properties because they do not provide a product or service on a day-to-day basis.

Overall, applicants must be able to demonstrate the ability to repay their debt as well as meet basic credit qualifications of the lending partner.

Where can I get more information? To learn more about SBA's role in financing a small business, visit the financing section of SBA's website or contact your local lender.

Al Haut has been a Business Development Specialist and Loan Officer for the U.S. Small Business Administration since 1989, having received a Bachelor of Science and Masters of Business Administration from Minnesota State University-Moorhead. He grew up working in his family's small business and is still involved as a partner. Al is also an adjunct professor with the University of Mary - Fargo. He can be reached at alan.haut@sba.gov.